Thursday, 16 December 2010

JOHN MANGUN
OUTSIDE THE BOX
Business Mirror
http://www.businessmirror.com.ph/home/opinion/4996-first-predictions-for-2011

From an economic standpoint, this may turn out to be the best Christmas season in recent memory. Retailers are forecasting a 15-percent jump in sales. Even Philippine Airlines is looking at a 10-percent increase in holiday bookings.

And ignore all the “expert” nonsense about consumer spending being fueled by overseas-worker remittances. The Bangko Sentral ng Pilipinas (BSP) just released a survey showing that the relatives of overseas Filipino workers (OFWs) are actually saving, not spending, their remittances. “The percentage of OFW households that utilized their remittances to savings climbed to 43.7 percent. BSP Deputy Governor Diwa Guinigundo said that ‘The percentage of Filipino families with OFW relatives who are turning to savings has increased significantly from 7.2 percent in the first quarter of 2007 when the survey started. On the other hand, he explained that the percentage of those who apportioned part of their remittances for major purchases and investments declined.’”

The Philippine economic forecasts for 2011 are lower and slightly more pessimistic than for 2010. Is that a valid prediction?

Having asked that, there is only one issue of importance for 2011. What will happen to the US dollar? Everything else economically, here and abroad, depends on the answer to that question.

The US Federal Reserve under Chairman Ben Bernanke is planning a massive infusion of money into the US and world financial systems. It is unprecedented in global history. Bernanke believes that he can do something that has never been done before— print a trillion dollars of new money, pump it into the economy, and force economic growth without triggering massive inflation. That is his prediction for 2011.

But what about some of the chairman’s past predictions?

On July 1, 2005, he said this about economists who worried about a housing-market collapse. On CNBC: “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

Bernanke was not worried about subprime mortgages either. In a speech on May 17, 2007, he said: “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited. The vast majority of mortgages, including even subprime mortgages, continues to perform well.”

The chairman has had some serious problems looking into the future concerning the economy. He said this on January 10, 2008: “The Federal Reserve is not currently forecasting a recession.” He continued with that prediction in June 2008: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” And his economic crystal ball did not work well for 2009 and 2010 either, “The forecast we have is for the economy, in terms of growth, to begin to turn up later this year. We think the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that.” Bernanke said that in May 2009.

Here are his latest comments about the Fed’s plan to pump nearly $1 trillion more into the economy by June 2011, made on December 5, 2010, during a television interview. Q: “Many people believe that could be highly inflationary. That it’s a dangerous thing to try.” Bernanke: “Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying treasury securities.”

Bernanke is the most dangerous man on earth. If the Fed is not pumping new money into the economy, what is going to stimulate economic activity? His argument about interest rates going lower is total nonsense. Interest rates in the US have never been any lower these past two years and have brought no significant economic activity.

If by then there will not be a massive infusion of cash into the mainstream US economy, then that trillion dollars will be used to fund the $300-billion government budget deficit and thereby increase more, the US debt obligation of $14 trillion.

What happened recently as it became clear that European government debt was out of control? The euro fell from its $1.60 high in 2008 to $1.20 low during the Greece crisis six months ago. The euro is down 8 percent in the last month.

If there is an attack on the dollar and it goes lower, there will be massive inflation in the US as that economy is dependent on imported goods and energy.

Assume that Bernanke will buy government debt at low interest rates, the desirability of the debt will go down because the only way to ever pay it off so much debt is with newly printed, lower-value money.

I predict inflation will be a great US problem and that we will see a large devaluation of the dollar in 2011.

This is what you want to look for to test my prediction that the dollar is under attack.

During the first quarter of 2011, gold moves above $1,500 per ounce. Crude-oil prices move and strongly hold above $100. There will be a strong and sustained stock-market rally in the US. By March 2011, official US inflation will hit near 1 percent.

For the Philippines, we will have a continuation of the stock-market rally which will see the next wave up putting the index at 4,500 to 4,800. The peso will move below 40 much more quickly than anyone thinks it will. Foreign investment will accelerate due to peso appreciation and to take advantage of favorable government and corporate financial stability.

Followers

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